Doug Smith: Shock Therapy For Economics, Part 1

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By Douglas K. Smith, author of On Value and Values: Thinking Differently About We In An Age Of Me

In “Economics In Crisis”, professor Brad DeLong notes:

The most interesting moment at a recent conference held in Bretton Woods … came when Financial Times columnist Martin Wolf (asked) Larry Summers, “[Doesn’t] what has happened in the past few years simply suggest that [academic] economists did not understand what was going on?”

DeLong agreed with Summers’ response: “the problem is that there is so much that is “distracting, confusing, and problem-denying in…the first year course in most PhD programs.” As a result, even though “economics knows a fair amount,” it “has forgotten a fair amount that is relevant, and it has been distracted by an enormous amount.” DeLong then goes on to call for serious change in what economics departments do and teach.

In Part 2 of this post, I’m going to address the realities of ‘serious change’; and, in that context, what is troubling for INET about Summers’ presence at the recent Bretton Woods gathering. I’ll do this from my experience in leading and guiding real change as well as by contrasting INET with another, smaller, and more nascent effort called Econ4.

For now, though, let’s put aside the serious lack of self-respect in paying any attention at all to a world historical failure like Summers (Why is this arrogant sophist even on anyone’s C list, let alone A list? Why isn’t Summers wearing sack cloth and rolling in ashes?). Instead, let’s respond to DeLong’s ‘fessing up to the crisis in economics:

I was shocked by how large a panic was produced by what seemed to me – and still does – relatively small losses (in terms of the size of the global economy) in subprime mortgages; by the weakness of risk controls at the major highly-leveraged banks; by how deep the decline in demand was; by how ineffective the market’s equilibrium-restoring forces have been at rebalancing labor-market supply and demand; and by how much core-country governments have been able to borrow to support demand without triggering any run-up in interest rates.

Stifle the Casablanca jokes. DeLong is no Captain Renault (“I am shocked, shocked that gambling is going on here.”). Renault was cynical; Delong is not. From what Yves and others tell me, DeLong, unlike Summers, has an open mind (see this for excellent description of what it takes to have a rational discussion). So, please, no personal attacks on DeLong (although go ahead and have at Summers).

Now, in the spirit of helping orthodox economics move beyond culturally induced ignorance, let’s pose some exam questions regarding what DeLong found so shocking. We’ll do this by looking at each shocking element; and, then, for extra credit, ask some ‘dog that didn’t bark’ as well as curricular and epistemological questions.

There’s no intention here of attacking DeLong personally. But these exam questions are specifically and clearly directed at him as well as other mainstream economists. Yes, tenured professors are more comfortable giving exams than submitting to them. Well, that’s one of the many things that must change if economics and economists are to emerge from this crisis with anything more than warmed-over excuses and rationalizations. Other professionals — lawyers, doctors, accountants — have faced up to requirements of staying current in fields that change rapidly. Economists must do so too. Any economics professor and/or professional who would purport to opine, teach and/or advise on any of the following topics ought to be required to demonstrate competence by answering these questions. And that includes DeLong.

Shocked at panic produced by relatively small losses in subprime:

    Exam questions


How small or large were these losses? First, how small or large were the direct losses in the subprime market? What was the size of that market and it’s loss severity? Do you include Alt A with ‘subprime’? Anything else? If not, why not – where and why do you draw the line? Is ‘subprime’ best understood by the characteristics of the customer; or, the terms of the transaction? In light of your answers to that, how large was the “subprime-like” market and what was the loss severity? Based on all this, how small or large were/are the total losses — and why do you call them ‘relatively small’? Relative to what? Relative to the size, leverage and funding requirements of CDOs? How small or large were the CDO losses that were triggered by losses in subprime and ‘subprime-like’ (however you define that)? Were these losses concentrated? If so, with what institutions, and how connected were those institutions to one another? That is, what was the size of the full contagion– and please address that relative to the interconnectedness of the players in what has been called a massively tightly coupled system? Are these losses ‘relatively small’?

What had you learned, written on, spoken about, conferenced about, taught about at either the undergraduate or graduate level, or otherwise explored in the five years prior to 2007/2008 that had relevance to any of these questions?

Shocked by the weakness in risk controls at the major highly leveraged banks:

    Exam questions:

Please describe for the major highly leveraged banks (both TBTF and shadow) what risks and whose risks were addressed by institutional risk controls? Also describe what risks and whose risks were not addressed by those controls. In addition, please describe the role and contribution of ratings agencies to the risk controls of major highly leveraged banks (both TBTF and shadow).

Please describe for the same organizations what were the reporting relationships over the past decade between those who take risks and those who design and implement risk controls? Please describe who had more power within these firms and why? What salary, bonus, stock option, career path and advancement tracks were in place for these respective groups; and, what were the effects of those things on the motivations of these people as well as the operational effectiveness of their interactions with one another?

What can behavioral economics and a census of executives/managers/traders et al in the highly leveraged banks (both TBTF and shadow) as well as those with key roles in ratings agencies tell us about the presence and effects of the following kinds of people in these institutions:

➢ People who are criminals? How many of these people work in these institutions and what effect did that have on risk controls?
➢ People like the famous Enron traders (“fuck California” link: are entirely unethical. How many of these people work in these institutions and what effect did that have on risk controls?
➢ People who claim to and even in some aspects of their lives comply with some basic ethical and/or rule-based behaviors but nonetheless are inclined to cheat and easily swayed to do so? How many of these people work in these institutions and what effect did that have on risk controls?
➢ People who attend to ethical and other rules but paint for themselves and others the most optimistic picture possible of their behavior and choices, especially when they’ll get rich by doing so? How many of these people work in these institutions and what effect did that have on risk controls?
➢ People who may not themselves fit any of the above categories and yet hierarchically report to people in the above categories and are disinclined to challenge authority? How many of these people work in these institutions and what effect did that have on risk controls?
➢ One last group: People who are ethical and abide by rules and quite willing to exert and/or challenge authority when they believe ‘the way we do things around’ here have serious shortcomings? By all means, please describe how many of these people work in these institutions and what effect did that have on risk controls?

What are the economics of control fraud? How do your responses to earlier exam questions in this section relate to those economics? For example, did the actual incentive structures, reporting relationships, job definitions, approach to risk controls and behavioral inclinations in the decade running up to 2008 contribute to control fraud? How often and why? Which of those elements – singly and in combination – have changed significantly as a consequence of Dodd Frank, Sarbanes Oxley, and other actions taken since 2008? Have these changes been significant enough to reduce the incidence of control fraud going forward?

What had you learned, written on, spoken about, conferenced about, taught about at either the undergraduate or graduate level, or otherwise explored in the five years prior to 2007/2008 that had relevance to any of these questions?

Shocked by how deep the decline in demand was:

(Here I’m assuming DeLong’s reference is to consumer and enterprise demand for goods and services and distribution thereof. He might, though, mean demand for securitization instruments, etc. But, let’s go with goods, services, etc.)

    Exam questions:

Please describe the typical cash flow sources (e.g. jobs, salary/wages, non-wage related income, debt/borrowing, etc) and uses (e.g. expenditures of all sorts) picture for households in each five quintiles by income and wealth, and how that picture changed from the early 1970s to 2008. Next, please describe each quintile’s evolving balance sheet over the same years and how that balance sheet related to the evolving picture of cash flow sources and uses? In light of each evolving picture, please describe any shifts in consumption capacity and robustness/sustainability of that capacity for each quintile? What do those analyses tell you about what might have been expected regarding the depth/shallowness of decline in consumer demand by 2008? And, what does your response to the last question suggest about the profile of enterprise demand (i.e. B2B) for goods, services, and distribution?

What had you learned, written on, spoken about, conferenced about, taught about at either the undergraduate or graduate level, or otherwise explored in the five years prior to 2007/2008 that had relevance to any of these questions?

Shocked by how ineffective the market’s equilibrium-restoring forces have been at rebalancing labor market supply and demand:

    Exam questions:

Please describe the sources of information best suited to understanding basic movements in the labor market’s supply and demand, and how and what you must do to make those sources of information intelligible? Next, list what you consider to be the three to five most important ‘market equilibrium-restoring forces’ relevant to labor market supply and demand. How do the following affect your understanding of these three to five forces on labor markets:

➢ Your answers to the exam questions about decline in demand
➢ The effect of ‘extend and pretend back door recapitilization with bonuses intact’ bail outs of TBTF banks and others on housing markets
➢ The relative importance of private sector, government sector and non-profit sector in job creation over the decade prior to 2008; and, within the private sector, how those sources for job creation varied by size of firm and number of years firms were in business
➢ Moves toward government austerity
➢ The cash positions of corporations
➢ The hurdle rates for investments in corporations and how they are designed and calculated
➢ Tax policy

Please describe what is meant by the ‘financialization of the economy’. Also describe what is meant by ‘turning the financial sector into a casino?” How does financialization of the economy and turning the financial sector into a casino relate to the equilibrium restoring-forces that rebalance labor market supply and demand? In answering this last question, please distinguish labor markets for those with high talents at engineering, math, marketing and sales versus others? Does financialization/casino/etc lead to any distortions and differences in the labor markets for jobs in financial firms versus the labor markets for jobs in other sectors?

With the functioning of labor markets in mind, please compare and contrast an economy whose policies and strategies are essentially focused on asset values and credit versus one whose focus is essentially on jobs and incomes. Considering that comparison, also please answer the following: Is financial activity socially useful? In what ways? Is financial activity ever socially useless and/or harmful? In what ways? Please describe the relationship, if any, between executive, trader, employee incentives and (i) financial activity that is useful; (ii) financial activity that is useless; and, (iii) financial activity that is harmful. As you consider these questions, please pay close attention to the effects of financialization and the ‘casino’ on income and wealth inequality; and, in turn, what effects that inequality has on families and communities? Human health and happiness? Democracy? Oligarchy? Crony capitalism?

What had you learned, written on, spoken about, conferenced about, taught about at either the undergraduate or graduate level, or otherwise explored in the five years prior to 2007/2008 that had relevance to any of these questions?

Shocked by how much core country governments have been able to borrow to support demand without triggering any run-up in interest rates:

    Exam questions:

Please describe the ‘demand’ that has been supported by the borrowings of core country governments? That is, demand for what and by whom and in what proportions (e.g. demand for goods and services vs demand for off balance sheet financing and so on)?

Please describe the sources/reasons for the ‘run up in interest rates’ that you would have expected, and how your expectations are affected by (i) a Zero Interest Rate Policy of the Fed; (ii) availability of risk-free interest revenue to financial institutions from the Treasury through arbitrage (i.e. borrow at zero, lend at something); and, (iii) the deep decline in demand that was the subject of your earlier shock?

Please describe how the financial balances of the following sectors interact in ways that affect an economy’s growth? Distribution of income and wealth? Interest rates?

➢ C (Personal consumption expenditures);
➢ I (Gross private domestic investment);
➢ E (Net exports of goods and services); and,
➢ G (Government consumption expenditures and gross investment).

What had you learned, written on, spoken about, conferenced about, taught about at either the undergraduate or graduate level, or otherwise explored in the five years prior to 2007/2008 that had relevance to any of these questions?

Extra Credit I: The Dog That Didn’t Bark

Professor DeLong does not write that he experienced any shock at the combined effects of the deregulation of ‘free’ financial markets, the cognitive capture of agencies, and the evisceration of enforcement budgets and personnel. Let’s assume this was not an oversight; and, that he indeed was not shocked by the severity and depth of turmoil triggered by the gutting of government’s role (indeed, the reversing of that role into one of partnership with the financial sector).

For extra credit, then, please describe what the last 20 years have taught the economics profession about the likely course and character of an economy led by the financial sector when that sector operates ‘freely’ in the absence of any law, rules, regulations or ethics not to mention service to or link with the real economy? In particular, please describe what happens when the financial sector becomes a casino where Captain Renault would be quite welcome – in particular what happens when some of the casino players wake up one day needing an infusion of short-term cash, but none of the other players will lend it? Please describe to whom these casino players turn, and on what terms?

And, in light of your response to this, please review and, if necessary, revise your answers to all previous exam questions about just how shocked you were by the events and patterns of the past several years.

What had you learned, written on, spoken about, conferenced about, taught about at either the undergraduate or graduate level, or otherwise explored in the five years prior to 2007/2008 that had relevance to any of these questions?

Extra Credit II: What changes would you make to economics curriculum and epistemology?

What would you change in curriculum for graduate and/or undergraduate economics? Specifically, what content that is currently core to graduate and/or undergraduate curriculum would you drop entirely or significantly alter (and how would you alter it).

In addition, which of the following would you significantly feature in graduate and/or undergraduate curriculum — not just mention in a ‘drive by’ way, but actually make core to the degree itself?

➢ Economic history
➢ History of economic thought
➢ Actual/real study of institutions (versus, say, mathematized study of them)
➢ Behavioral economics
➢ Distribution economics
➢ Modern monetary theory
➢ Networks, systems and resiliency
➢ History/history of thought in general
➢ Ethics – both in general and as applied to economists and the work they do, for whom, and with what compensation and reward
➢ Gross Domestic Happiness and other alternatives to GDP
➢ Other?

What, if anything, would you change about the epistemology of economics? That is, the basis for the knowledge claims that economics and economists make? What role, if any, would fact gathering and empiricism play in the future of economics epistemology; and, how does that significantly differ from the past? What role does/should the scientific method play in the epistemology of economics; and, in that vein, what role should Popper’s falsification have? What role would assumptions such as rational beings and perfect and perfectly accessible information have, if any? What role would assuming away such things as instability, unemployment, and distributional and power inequalities play, if any? What effects (for example, regulatory and cognitive capture) do high concentrations of power and wealth in a market economy have on the conduct and knowledge claims of economics and economists? How would you characterize, if at all, any minimum threshold of ethics as a dimension to knowledge claims? In order to avoid tautologies, how carefully should economics compare and contrast the specific content of the assumptions it makes with the specific content of the conclusions it draws?

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  1. DownSouth

    Douglas K. Smith said: “Other professionals — lawyers, doctors, accountants — have faced up to requirements of staying current in fields that change rapidly. Economists must do so too.”

    Yes, but practitioners in other fields, with the exception of religion, have used the experiences of the last few centuries to hone their skills and improve their trade. Economists, on the other hand, cling to a 500-year-old ideology based on minimalist assumptions as if it were a life raft in turbulent waters.

    The modern economics profession is very much reminiscent of Saint Vincent of Lérins’ description of the Catholic Church. Writing in his Commonitoria (Memoranda, c. 430) he said that the Church had become

    a faithful and ever watchful guardian of the dogmas which have been committed to her charge. In this secret deposit she changes nothing, she takes nothing from it, she adds nothing to it.
    ▬quoted from William Manchester, A World Lit Only by Fire

    1. DownSouth

      And as to Smith’s question of “People who are criminals?”

      Neoclassical economists have defined down deviancy (or should I say have come to celebrate deviancy?) to the point where the word “criminal” no longer exists. Robert H. Nelson, writing in his book Economics as Religion in a very insightful section entitled “Thou Shalt Steal (If It Pays)” has this to say about the Nobel-Prize-winning Chicago economist Gary Becker:

      It says in the Ten Commandments in the Bible, Thou shalt not steal (Exodus 20:15). For Becker, however, understanding (and preventing) crime is explained not by such Christian homilies, but by hard economic motives. Indeed, stealing is simply another form of rational maximization of individual income and utility. Most people refrain from stealing because it would not be profitable for them; for some people it happens to be profitable and they become thieves. Economically, a theft is a “redistribution” of resources, in much the same broad category, technically speaking, as government welfare programs.

      Of course, most people would naively object that stealing is morally wrong, but that the welfare form of redistribution of income is legitimate because it has been approved by a democratic process. However, the Chicago school also finds that official rationales in politics often cannot be taken at face value. Welfare programs really involve coercively taking money from some people to give it to others. If collective “theft” by government can be analyzed without one’s feeling a need to interject extensive moral commentary, why not put theft by ordinary criminals in the same economic category? As Becker argues, the “basic motivation” of criminals is the same as that of “other persons.” Criminals are distinguished not by their lack of moral character, but by the fact that “their benefits and costs differ,” perhaps in part a consequence of their having different physical and mental endowments for crime.

      Becker at one point comments that stealing per se is not inefficient. In a sense, “frauds, thefts, etc., do not involve true social costs but are simply transfers, with the loss to victims being compensated by equal gains to criminals.” However, responding to their private incentives, people will steal up to the point where the objects gained (stolen) have a money value equal to the work effort in doing the stealing. It is only in this sense that it is possible to judge criminal actions as inefficient (“wrong” in the morality of economics) because acts of stealing produce no useful outputs, and yet can absorb considerable productive resources of society (the time and effort of the criminals themselves).

      In considering how society should deal with crime, Becker argues that the total social welfare function must also include “the social value of the gain to offenders” from crime. Criminal activities should be treated in the same way as building cars and engaging in other economic activities, although they have certain special economic characteristics—-they are, for example, “an important subset of the class of activities that cause diseconomies” to others (i.e., to the victims of crime), a class which also include such things as factories that emit smoke and other public nuisances.

      Nelson goes on to conclude that:

      Becker’s treatment of crime highlights the absence of any absolute social concepts such as “justice” or “morality” in the framework of thought that he applies to human behavior. Individuals may constrain their behavior of their own accord (based on some concept of “justice” in their mind) but there is no place where “society” meaningfully says, “this is not allowed because it is ‘wrong.’ “

      1. Steve

        An economist can develop a model to explain economic behavior without having to comment on the moral issues underlying the behavior.

        They are not moral philosophers.

        1. craazyman

          when altruism is an instinct, any model that explains human behavior without acknowledging that instinct is by definition woefully incomplete.

          There is an instinctive basis for altruism, as any real study of human survival would show — i.e. the preservation of a tribal unit through behavior that enhances group cooperation.

          Behavior that destroys group cooperation threatens the existence of the tribal unit — and therefore the tribe’s “economy”.

          This should be the beginning of any real analysis of economic systems, not a peripheral aspect, and certainly not one that is completely ignored or — worst of all — denied through sophist rationalizations that obfuscate and hide the most fundamental bases for the construction of what we call a society.

          1. DownSouth


            Yep. And that’s why economics has been no more successful than religion in regulating selfish behavior. All we did was replace one dogma based on a minimalistic assumption with another dogma based on a minimalistic assumption.

            David Sloan Wilson summed it up perfectly:

            Finally, there is the question of whether a belief system can combine the best of religion and science, enabling people to flourish in sustainable communities while remaining fully committed to factual realism. It is important to realize that this would be a new cultural adaptation, never before seen on the face of the earth. Factual realism has always been the servant of practical realism, showing up when useful and excusing itself otherwise. This has been true starting with the perceptual systems of bacteria. Our minds are genetically designed to encode instructions for how to behave as factual statements. It is as natural for us as having sex and demonizing our enemies. Only now, in highly differentiated modern societies, has it become important to create a large body of factual knowledge that can be trusted, to solve practical problems at an unprecedented social, spatial, and temporal scale. Fortunately, human moral systems are flexible and temporal enough to embody anything that is deemed good and right, even if it demands discipline and self-restraint, as it usually does. The first step is to decide that factual knowledge is a virtue—-sacred, if you like—-and that value systems must treat statements of fact more respectfully in the future than in the past.
            ▬David Sloan Wilson, Evolution for Everyone

          2. ellen1910

            Altruism expressed in the immediate presence of a suffering subject may be instinctual (the “altruism gene”?) but might better be said to be the the result of actions taken to rid oneself of the emotional distress caused by witnessing another person’s pain and suffering by relieving that person of said pain and suffering and altering the scene — for example, by rescuing him/her (the “empathy gene”?).

            Where an act suspected to be motivated by altruism is the result of the actor’s imagining the harm, its basis in instinct is questionable.

          3. craazyman

            ellen I’m not sure what you’re talking about, but after half a bottle of red red wine you can just about figure anything out. xanax helps too. if you don’t think directly at it and just think to the side, you’ll see it appear, like a star in the night sky. the way it brightens on the sides of your vision. if you look right at it, its gone.

            you may be confusing altruism with pity or empathy. I think those are emotions based on identification and projection, which requires imagination. they are posterior to instinct in the psychomotive timeline sequence (PTS).

            Instincts are unconscious and don’t rely on imaginative projections (although they can empower these, like the procreative drive powers romantic love). Altruism is a primal force at an instinctive level. It is broadcast from a big radio tower in the middle of the milky way galaxy through all the dna snakes in your arms and legs and head and stomach. there are billions of them, all like little radios and it’s hard to change the channel. you just have to listen and say what the f–c is that show all about? the big show like rain falling until it hits the pavement and the show is over. maybe then you’ll know. but you won’t be able to tell anybody by that point.

            nobody can prove this stuff. it just is. and you have to see the energy of it with your gates wide open. economics is like that too. those dudes need to drink more and smoke some weed and just drift and it would all be a lot clearer to them.

          4. DownSouth


            As David Sloan Wilson explains, your “claim cannot be refuted logically.” However, the “empirical evidence for exclusive psychological egoism is nonexistent.” Furthermore, it does not explain “the factors that cause groups to evolve into adaptive units.” Here’s Smith:

            Psychological egoism is the claim that all psychological mechanisms that drive behavior count as self-interested, in which case the bottom row in Table 1 would be empty. As with the evolutionary concept of self-interest, we need to ask two questions: Is the claim of psychological egoism true, and does it shed any light on our specific question of when groups evolve into adaptive units?

            The first question is evaluated in detail in part II of Sober and Wilson (1998). To make a long story short, the claim cannot be refuted logically but is unlikely to be true based on evolutionary principles. Any behavior, no matter how other-oriented, can theoretically be caused by egoistic proximate mechanisms, but these mechanisms are often like inefficient and error-prone Rube Goldberg devices compared to simpler and more robust non-egoistic mechanisms. After all, if behaviors have been selected to be other-oriented, what simpler way to motivate them than by other-oriented proximate mechanisms? The empirical evidence for exclusive psychological egoism (bottom row of Table 1 empty) is nonexistent. On the contrary, the most careful research points to a mixture of self and other-oriented mechanisms and the case for exclusive egoism survives only by postulating ever more remote and difficult to test egoistic hypotheses once the simpler ones have been eliminated (e.g. Batson, 1991).

            Even more important, the answer to the second question is “no,” regardless of the answer to the first question. Just like the extended evolutionary concepts of self-interest, psychological concepts suffer from being too ambitious. In their drive to explain everything as a form of self-interest, they lose their ability to ask more focused questions. Let us grant for the sake of argument that the bottom row of Table 1 is empty. Insofar as psychological egoism is sufficiently flexible to motivate both self- and other-oriented behaviors (both columns of Table 1), it remains as silent as selfish gene theory on the factors that cause groups to evolve into adaptive units (the first column vs. the second column)…

            The impulse to think of genes and organisms that don’t think
            at all (such as bacteria and plants) as self-interested makes it clear that the concept of self-interest is serving primarily as a heuristic device for the human modeler, not a claim about the mechanisms that cause behavior in the proximate sense.


          5. Anonymous Jones

            Craazyman, that was best comment I’ve read on this site in months, and it’s definitely ‘craazy’ in the Yossarian sense of the word – altruistic instinct is too obvious and too crucial to the debate to be sane, precisely because we inhabit an insane world in which people desperately want to believe in things as they don’t, or couldn’t (though perhaps ‘should’), exist rather than how things actually exist.

        2. Tao Jonesing

          “They are not moral philosophers.”

          You’re right. They’re immoral philosophers.

          Modern economists pretend that all human decisions are– and ought to be– done on a purely utilitarian basis measured solely in monetary terms. Defining morality as being properly outside of what should be considered when making a decision that affects society is not amoral but immoral.

          1. Steve

            “Modern economists pretend that all human decisions are– and ought to be– done on a purely utilitarian basis measured solely in monetary terms.”

            I would politely disagree. They use this money/utility analytical paradigm because it’s the best explanation for human activity. Economics is rooted in empiricism, not moral philosophy.

            “…Ought to be..” has nothing to do with it. You are making this up and I challenge you to quote me a modern economist who says this.

          2. DownSouth


            Perhaps Reinhold Niebuhr said it best:

            The false abstraction of “economic man” remains a permanent defect in all bourgeois-liberal ideology. It seems to know nothing of what Thomas Hobbes termed “the continual competition for honor and dignity” in human affairs. It understands neither the traditional ethnic and cultural loyalties which qualify a consistent economic rationalism; nor the deep and complex motives in the human psyche which express themselves in the desire for “power and glory.” All the conflicts in human society involving passions and ambitions, hatreds and loves, envies and ideals not recorded in the market place, are beyond the comprehension of the typical bourgeois ethos.

            Inevitably this meant that social realities would develop which were not anticipated in the creed. The strong would and did take advantage of the weak. Prudence was not wise or strong enough to deter them. The earlier industrialism did aggravate, rather than mitigate, the lot of the poor, as certainly as it accentuated the disproportions of power existing in traditional societies. Reason which, according to the liberal creed, would always seek the point of concurrence between the interests of the self and of the other, could not function consistently in this manner. Rather it conformed to Thomas Hobbes’ conception of the function of reason. It would make demands upon the community which seemed reasonable to the claimant and inordinate from the standpoint of the community.


            [I]t is not possible to establish justice amidst the vast concentration and competition of power in modern technical society if the illusions and miscalculations of a liberal society are not radically modified.
            ▬Reinhold Niebuhr, The Irony of American History

          3. Yves Smith Post author


            You’ve REALLY discredited yourself by arguing that economics is rooted in empiricism. It’s the polar opposite. It starts from bizarre assumptions about human behavior and is positively allergic to empirical work (what is calls “empirical” is limited to tidy data sets tortured with limited types of mathematical analysis).

            A very simple proof: economics is the only social science that rests on the premise that humans are rational.

            And the “ought to be” is correct too. I discuss in Chapter 4 and the beginning of Chapter 5 of ECONNED how economists try to impose what amount to value systems around “rationality” on their fellow practitioners and the greater public, including their tortured efforts to explain altruism.

          4. Martin Finnucane

            Thus quoth Steve:

            Economics is rooted in empiricism …

            And fire is the release of phlogiston, the fire element released in combustion. If only you can see it. You can just see it, right?

        3. Main Street Muse

          “[Economists] are not moral philosophers.”

          I don’t care about the economists’ ability to philosophize. It is when they build models that overlook key human frailties that their own frailties and failures become evident.

        4. chris murphy

          You are inaccurate when you suggest that Becker or the rest of the Chicago school are merely engaged in the descriptive exercise of explaining economic behaviour. In fact they are engaged in the prescriptive exercise of reommending policy based on a particular value choice, Kaldor Hicks wealth maximization. This choice is a moral judgement and the Chicago boys are happy to acknowledge this fact when it suits their purposes by invoking “individual freedom”. When it doesn’t suit their purposes they choose to pretend that their analysis and policy choices are entirely technocratic.
          I would remind you that Adam Smith was the author of “The Theory of Moral Sentiments” and he knew that economic policy was intrinsically a matter of moral value.

      2. Roger Bigod

        Becker is totally off base. Out in the real world, people don’t steal because a sense of property is wired into the nervous system. They don’t sit down and calculate the odds and payoffs.

        More seriously, he mentions externalities of crime only in connection with damage to the immediate victim. But there’s a huge social asset in a safe neighborhood or an honest market. One of the worst effects of the recent unpleasantness is the loss of trust in large financial institutions and the regulators.

    2. KnotRP

      > I was shocked by….how ineffective the market’s
      > equilibrium-restoring forces have been at
      > rebalancing labor-market supply and demand

      Brad assumes Bankers are a rebalancing force,
      which is the crux of his failure to recognize why
      the problem got so large. Bankers were busy
      sucking the main street economy dry…the opposite
      of a rebalancing force, and leaning into it quite hard
      at that. Apparently there is no vampire squid plug-in
      for their models (I’m being generous, as I think it is
      safe to presume economists produce the material
      their patrons need…and those who don’t are quickly
      excised from flock)

  2. fresno dan

    all good questions.
    I would like to see the proposition that the economics profession accurately describes any financial phenomenon(the basis of evaluation of any actual science)tested. That is, the listing of all variables, their contribution to the affect, and the coefficient of variation (I would expect the coefficient of variations to be in the millions and billions, kind of like the possibility of a nationwide downturn in house prices)

  3. F. Beard

    If we truly had a free market in the US then I’d be alarmed that it was unstable. Instead, the most important component of capitalism – money – is controlled by a government backed cartel using a government enforced monopoly money supply for private debts.

  4. attempter

    DeLong agreed with Summers’ response: “the problem is that there is so much that is “distracting, confusing, and problem-denying in…the first year course in most PhD programs.” As a result, even though “economics knows a fair amount,” it “has forgotten a fair amount that is relevant, and it has been distracted by an enormous amount.” DeLong then goes on to call for serious change in what economics departments do and teach.

    Yup. Krugman agrees with that too.

    And I agree that the difference is that Summers and Renault are cynical, i.e. always know that they’re lying, while Krugman and Delong probably always straddle the line of conscious lying and so desperately wanting to believe what they’re saying that they convince themselves.

    IOW, they’re too morally weak for their own crimes.

    Anyone who’s read The Peter Principle will recognize this call for “better economics education” as a symptom of the fundamental absurdity of the entire project. We don’t need better economists. We need to eradicate “economics” as such and restore political economy as the proper humanist discipline. Not a science, with no pretensions to dogma, and always placed within the context and subservient to the goal of the betterment of humanity as a whole. The reason “economics” as a stand-alone was split off in the first place was that political economy couldn’t support the criminal ideology which capitalists wanted to propagate. They needed a more pliable, nihilistic tool.

    To give an obvious example, any system of thought which is capable of viewing human beings as mere “labor inputs” is logically invalid and morally evil on its face.

    The fact is that all of modern economics, including the “reforms” someone like Delong may or may not sincerely want, is dedicated to one goal only: Justifying the elites’ continued robbing the productive people of the economic production and political power which belongs to us by all right, 100% of it. (For example, cf. Krugman’s “data” to justify an even more regressive tax code, which one of his sycophants was so kind to mention in one of yesterday’s threads.)

    1. DownSouth


      I don’t think the world has seen anything comparable to neoclassical economics, in its ubiquity and perniciousness, since racial “science” swept the world in the 19th and early 20th centuries. For an informative discussion of racial science, there’s an article, “German science and black racism—-roots of the Nazi Holocaust” by Francois Haas, available on the internet.

      It’s instructive to note that both neoclassical economics and racial science are based on the abuse of evolutionary science. Neoclassical economics is based on an exclusive emphasis on individual interest. Racial science is based on an exclusive emphasis on group interest. Combine these minimalistic assumptions with the immorality inherent in the dogmas of Herbert Spencer and Sir Francis Galton (popularized in the 1860s as Social Darwinism), and you have the recipe for genocide.

      It is no wonder that American businessmen and Southern racists jumped on Social Darwinism. As Robert H. Nelson writes in Economics as Religion:

      Historian Sidney Fine reports that “it would be difficult to overestimate Spencer’s popularity in the United States during the quarter century after the Civil War.” At the end of the nineteenth century, “no authority was more often cited by the opponents of state action than Herbert Spencer.” When the Supreme Court took up the ‘Lochner’ case in 1905, Spencer’s version of social Darwinism was exerting such a powerful influence on American social thought that Justice Oliver Wendell Holmes felt compelled to remind his Court colleagues that it was not their place to implement the economic theories of Herbert Spencer. As Fine explains, “Spencer’s views appealed to Americans for a variety of reasons. His optimistic presentation of the beneficient operation of nature’s laws was thoroughly consonant with the American faith in progress. His individualism, although it went too far for most Americans, was nevertheless in the best American tradition. Above all, his application to society of Darwin’s theory suited the tastes of the American businessman.

      The new titans of American industry indeed looked to social Darwinism to bless their victories in the market and resulting accumulations of vast wealth—-potentially a source of considerable anxiety in an America where Calvinist and Puritan impulses were still strong. Prior to the Civil War in the United States, there were few business corporations. By 1900, two-thirds of all U.S. manufacturing activity was being carried on in businesses operating under corporate ownership. Apparently, the survival of the fittest in the new industrial world would often mean the survival of the largest, a lesson that American business took newly to heart and for which the ideas of Spencer could offer a seemingly scientific justification. The workings of evolutionary biology that Darwin had discovered must surely also be the natural law of economic affairs.

      1. attempter

        When you get to reading Origins of Totalitarianism you’ll find an extensive discussion of how racialism led to exterminationist racism.

        Shock Doctrine does the same for how neoclassical economics leads by design to slavery and mass murder. (That’s part of why I regard Shock Doctine as a kind of volume four of Origins.)

      2. Steve

        “Neoclassical economics is based on an exclusive emphasis on individual interest.”

        This is so, but not because Neoclassical economist were deliberately ignorant of moral issues, but because they were trying to develop an analytical paradigm that best explained human economic actions (see Smith’s “Theory of Moral Sentiments”, which I’m sure someone as erudite as DownSouth has already studied).

        The early economists were Empiricists for the most part, trying to develop a “scientific” explanation for economic activity. I don’t think Adam Smith thought that pursuit of individual goals was necessarily a moral imperative or the highest expression of man’s humanity. But I do believe he thought it was the motive that best explained people’s economic behavior.

        How and why politicians have used the theories of these early economists is a whole other question.

        1. DownSouth

          I think it would be a mistake to confuse liberal economics with neoclassical economics. While there was some subtlety and nuance in Adam Smith’s work, that has all been purged from neoclassical economics.

          One of the best criticisms of liberal economic theory that I’ve found is by Reinhold Niebuhr:

          A bourgeois society regards the achievement of social harmony as fairly easy. It tends to believe that it is only necessary to remove irrelevant political restraints from economic activity; and then the “natural system of liberty” will become effective. It believes that the self-interest of each individual is checked and balanced by that of every other individual. If this check is not sufficient, an “enlightened” self-interest which knows how to find the point of concurrence between the interests of self and those of the community will ostensibly supply the deficiency. This serene confidence in the possibilities of social harmony is derived both from one of the great achievements of a commercial culture, and from a natural illusion of such a culture. The achievement was the discovery that men could be brought most effectively into the vast system of mutual services in a complex society by engaging their “self-interest” rather than their “benevolence” [All of the world’s major religious traditions of the world hold that mutuality is best achieved through men engaging their benevolence.]. The cobbler would make shoes and the farmer would raise wheat and the tailor would fashion a coat; and they would exchange their several products. Each would gain in the exchange; for it permitted a specialization of labor which improved the efficiency of each. Each would seek his own gain, or rather that of his family; but each would be prompted to serve the other in the system. There are elements of truth in this discovery of classical economics which remain a permanent treasure of free society, since some forms of a “free market” are essential to democracy. The alternative is the regulation of economic process through bureaucratic-political decisions. Such regulation, too consistently applied, involves the final peril of coming political and economic power.

          On the other hand, the liberal society never achieved the perfect harmony of which it dreamed because it overestimated the reciprocity of the free market and also equated economic competition with all encounters in society. It overestimated the reciprocity of the market because it was oblivious both to the elements of power in society, and to the disproportions of power in economic life. Power, in the thought of the typically bourgeois man, is political. He believes that it must be reduced to a minimum. The earlier bourgeois man wanted to eliminate political power because it represented the special advantages which the old aristocracy had over him. The present bourgeois man wants to reduce it to a minimum because it represents the effort of a democratic society to bring disproportions of economic power under control. In the shift of motive from earlier to later bourgeois man lies the inevitable degradation of the liberal dogma.
          ▬Reinhold Niebuhr, The Irony of American History

          1. Steve

            Thanks for this interesting post.

            “The achievement was the discovery that men could be brought most effectively into the vast system of mutual services in a complex society by engaging their “self-interest” rather than their “benevolence” [All of the world’s major religious traditions of the world hold that mutuality is best achieved through men engaging their benevolence.].”

            It seems easier to define “self interest” than it is to define “benevolence”.

            With all due respect to Niebuhr, he attacks a straw man here. Smith and the Neo-classicists who followed him would object to the notion that “men could be brought most effectively into the vast system of mutual services…”. “Men” have engaged in commerce since time immemorial. Who brought anybody into anything? Commerce predates almost any “system” other than tribal government.

            Smith merely observed that in a free system of exchange, we do not have to depend upon “benevolent butchers and bakers” for our food. At no point did he suggest his model was the framework for all human interaction, as he makes clear in the Theory of Moral Sentiments. RN overreaches here.

          2. DownSouth


            You know I’ve read quite a bit. And I don’t think I’ve ever found one single person who would agree with you. Here are just a few examples:

            §These questions led Smith to a formulation of the laws of the market. What he sought was “the invisible hand,” as he called it, whereby “the private interests and passions of men” are led in the direction “which is most agreeable to the interest of the whole society.”
            ▬Robert Hielbroner, The Worldly Philosophers

            §Mandeville’s fable of the bees, along with Adam Smith’s metaphor of the invisible hand, has long been used to convey the idea that a well-functioning society can be forged out of individual self-interest. This idea has become such a tenet of modern thought that for many it is an unquestioned axiom and for decades it has served as the foundation of formal economic theory.

            §Adam Smith’s notion that as each actor in the market pursues his or her own goal, the result will not be destructive conflict, but, on the contrary, an automatically harmonious and self-perpetuating system. Moreover, the exchanges—-which is what the market is all about—-will organize the use of resources in a maximally efficient manner, without outside intervention. Maintaining stability and order either has been “implicitly assumed and hence entirely ignored; or alternatively order is explicitly taken as a given.” (Schott, 1984. See also Thurow 1983)
            ▬Amitai Etzioni,
            The Moral Dimension: Toward a New Economics

            §In 1776, Adam Smith published ‘The Wealth of Nations’. In it, he argued that the uncoordinated actions of large numbers of individuals, each acting out of self-interest, sometimes produced, as if by “an invisible hand,” results that were beneficial to a broader society.
            ▬Yves Smith, Econned

            §Back in the eighteenth century, the ideas of Mandeville (as those of Machiavelli before him) were still met with great hostility by the public. Mandeville’s book was even convicted as “a nuisance” by the grand jury of Middlesex in 1723. By the end of the century, however, the concept of “Private Vices, Publick Benefits” became a solid part of scientific mainstream, largely due to the work of Adam Smith (1723-90). In his masterpiece ‘The Wealth of Nations’, Smith wrote…”By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”


            Rational self-interested agents cannot join together in a functioning society—-this could be one of the fundamental theorems in sociology. IN a world where all individuals behave strictly rationally, armies would run away at the first shot (or would not even get together in the first place). Nobody would vote or pay taxes. IRS agents would accept bribes not to prosecute tax evaders, and then pass some fraction of that to the members of the Senate overseeing committee, to buy them off. The courts would make verdicts in favor of whoever can pay more, or has more power to intimidate the judges and juries. The police would let criminals go in exchange for part of their loot. Actually, I am painting too rosy a picture—-when all behave in a purely self-interested manner, there will be no IRS, courts, or police. There could only be a Hobbesian war of all against all.
            ▬Peter Turchin, War and Peace and War

            §The ideas presented in this book are part of a continuous line of intellectual inheritance from Adam Smith and his friend and mentor David Hume, through Thomas Malthus, Charles Darwin, and Emile Durkheim, and more recently the biologists William Hamilton and Robert Trivers. But Smith’s legacy also led in another direction, through David Ricardo, Francis Edgeworth, and Leon Walras, to contemporary neoclassical economics, that recognizes only self-interested behavior.

            The twentieth century was an era in which economists and policy makers in the market economies paid heed only to the second Adam Smith, seeing social policy as the goal of improving social welfare by devising material incentives that induce agents who care only for their own personal welfare to contribute to the public good. In this paradigm, ethics plays no role in motivating human behavior. Albert Hirschman (1985) underscores the weakness of this approach in dealing with crime and corruption:

            “Economists often propose to deal with unethical or antisocial behavior by raising the cost of that behavior rather than proclaiming standards and imposing prohibitions and sanctions…. [Yet, a] principal purpose of publicly proclaimed laws and regulations is to stigmatize antisocial behavior and thereby to influence citizens’ values and behavior codes.”

            Hirschman argues against a venerable tradition in political philosophy. In 1754, five years before the appearance of Smith’s ‘Theory of Moral Sentiments,’ David Hume advised “that, in contriving any system of government…every man ought to be supposed to be a knave and to have no other end, in all his actions, than his private interest.”
            ▬Herbert Gintis, Samuel Bowles, Robert Boyd and Ernst Fehr, Moral Sentiments and Material Interests

            §The Chicago gospel in this respect is actually at least as old as Adam Smith, who also believed in the harmony of the natural order, grounded in the operation of the law of self-interest. The theologian Paul Tillich once explained that it was characteristic of the thinking of the entire eighteenth century that the “principle of presupposed harmony…produces indirectly what [in an earlier era] was supposed to be produced directly by a divine interference.” Well before the Enlightenment, the natural-law theology of the Roman Catholic Church had sought an improved understanding of a harmonious world operating according to rational laws put in place by God. In the Enlightenment, the secular idea of the “harmony” of nature replaced the earlier transcendent role of “supernatural authority.” Indeed, Tillich found, “the first clear expression…can be seen in the area of economics. It was expressed by Adam Smith…in his idea of harmony” as yielded by the workings of the natural forces of self-interest in society.


            Hence, as the intellectual historian J.L. Tlamon comments, all manner of social thinkers throughout the eighteenth century regarded self-interest as “the most real and most vital element in man and human relations.” Or, as Louis Bredvold explained, for the Enlightenment self-interest was the “moral law of gravitation.” Francis Hutcheson, a teacher and mentor to Adam Smith, had declared that the force of “self-love” was as central “to the regular State of the Whole of Gravitation” was to the harmonious workings of the physical universe.

            The elements were now all in place for a new Newtonian science of society. Adam Smith became the founder of modern economics by putting it all together effectively in one grand picture, supported by a great wealth of practical detail. The free market portrayed by Smith showed a Newtonian mechanism operating in perfect harmony according to the natural laws of the force of self-interest. For “Smith, if something is truly natural,” in effect “it is right because it conforms to the will of the Deity.” All that is necessary to achieve the wonderful prospect of living in strict conformance with the laws of the universe is that governments, churches, and other social institutions cease to interfere with individual actions in pursuit of self-interest in the market. The result in the late eighteenth century was “the spiritualization of economic life.”


            The Protestant Reformation had introduced a new individualism into the relationship of human beings and God, abolishing the large intermediary church role as found in Roman Catholicism. Salvation was “by faith alone” and only God could know what was really in the heart of a man or woman. In the free market of Adam Smith, conformance the natural laws of self-interest was also to conform to the laws of God. Here as well there was no need to consult with any state bureaucracy or other outside church or other official body in order for a person to do the will of God. As the mention of God would gradually be dropped from free-market theories, the old individualism of the Protestant relationship to God would take anew secular form in the actions of individuals in the free market.
            ▬Robert H. Nelson, Economics as Religion

            §By the end of the Enlightenment, many thinkers treated human beings as quasi-divine. This is especially clear in someone like Kant who asserts that human beings are infinitely valuable ends in themselves. Such a view is only possible because of the transference of what hitherto were considered divine attributes to human beings. The Enlightenment (and post-Enlightenment) exaltation of human individuality is thus in fact a form of radical (although concealed) Pelagianism. Divine or at least quasi-divine powers reemerge although always in disguise. Nature is an embodied rational will; the social world is governed by an “invisible hand” that almost miraculously produces a rational distribution of goods and services; and history is the progressive development of humanity toward perfection.
            ▬Michael Allen Gillespie, The Theological Origins of Modernity

            §Following the publication of Adam Smith’s treatise, ‘An Inquiry into the Nature and Causes of the Wealth of Nations,’ in 1776, the idea that minimal government interference in trade and production meant maximum wealth and well-being gained ground at a rapid pace.
            ▬Aaron L. Friedberg, The Weary Titan

          3. Tao Jonesing


            I read what Adam Smith had to say in the “Wealth of Nations” within the broader context of everything he wrote and planned to write, including his earlier “The Theory of the Moral Sentiments.” (This was back in the day where economists admitted they were moral philosophers.) My personal view is that the “invisible hand” worked because a natural part of an individual’s self interest is maintaining the society in which he lived.

            If you look at the arc of historical economic literature (at least what you can find of it at Google Books), it appears as if the founders of neoliberalism resurrected Adam Smith’s Invisible Hand metaphor from the dustbin of history and posited it as saying exactly the opposite of what Smith actually meant. Smith was largely forgotten by the late 19th century. Since everybody had forgotten all about Smith, it was easy enough to accept the neoliberals’ spin on what he said. Lippmann was the first to take aim at that goal, with Hayek and Friedman soon following. In many ways, neoliberals have Gunar Myrdall to thank for identifying the “communicstic fiction” in the Invisible Hand metaphor, which the neoliberals turned on its head. My theory is that Myrdall and Hayek were co-winners of the Nobel Prize in economics because (1) Myrdall identified the communistic fiction of classical liberalism, and (2) Hayek identified how to excise the communistic fiction from neoliberalism.

  5. S-Pernick

    I’m an Econ Major at the New School in New York. These are excellent questions. All Econ Majors should know the answers to these. If you’re thinking of partnering with Econ programs look at the New School for Social Research and PERI at Amherst.

    1. Doug

      Thanks S-Pernick. The econ4 effort mentioned briefly is being guided by key people at PERI — and I’ll ask them to reach out to the New School. So, please stay tuned – and, if you and/or colleagues want to get more involved, let the econ4 folks know.

      1. stf

        Also, profs at UMKC were publishing on these issues. Bill Black at UMKC developed the concept of control fraud. Even grad students at UMKC were publishing on these issues in some cases. I doubt they’d have too much trouble with this exam.

  6. old truths

    economics is about human action.

    human action has to have an ethical basis, because humans have ethics at their core.

    economics considers human action as ethically neutral.

    hence economics is lost because its model of a human being is wrong and incomplete.

    worse, it is used to mislead the masses. most establishment economists (eg, summers etc) are practitioners of deception.

    1. readerOfTeaLeaves

      hence economics is lost because its model of a human being is wrong and incomplete.

      I would add that current econ theory fails to address social psychology, and fails to adequately address the issue of externalities.

      As for Summers and the rest, I think this part of the exam might more astutely and thoroughly eradicate the fuzzy thinking they appear to exhibit:

      What are the economics of control fraud? How do your responses to earlier exam questions in this section relate to those economics? For example, did the actual incentive structures, reporting relationships, job definitions, approach to risk controls and behavioral inclinations in the decade running up to 2008 contribute to control fraud? How often and why? Which of those elements – singly and in combination – have changed significantly as a consequence of Dodd Frank, Sarbanes Oxley, and other actions taken since 2008? Have these changes been significant enough to reduce the incidence of control fraud going forward?

      The failure of current economics to address control fraud is a key error.
      The failure of Summers and others to come to grips with this fundamental error is a grave problem for the economics profession.

      It seems roughly equivilent to the medical profession failing to acknowledge the existence of cancer, or the processes that disease exhibits, or the damage it causes.

  7. Jim the Skeptic

    A formula for the failure of modern economics:

    1.Demand a rich data set which will not be available for earlier periods of history. This will focus your attention on modern data.

    2.Concentrate on data collected during the 42 year period from 1940 to 1982 when taxes on the highest brackets was 70% and above. Ignore any effect that may have had on the velocity of money.

    3.Assume an ever present high consumer demand regardless of consumer income.

    4.Assume an ideal world when thinking about GLOBAL FREE TRADE. Assume that no nation would take advantage of their trading partners disregard for the welfare of their workers.

    5.Completely disregard the effects of illegal immigration on wages. The velocity of money is not very important, so ignore any possible effects caused by those immigrants sending part of their wages back home.

    6.Ignore Alan Greenspan’s periodically revving up the economy to mask increasing consumer problems. Assume that the Fed Funds Rate drifting lower and lower over 25 years is insignificant.

    1. Valissa

      re: Demand a rich data set…

      The Great Wave: Price Revolutions and the Rhythm of History by David Hackett Fischer

      Highly recommended if you want to get both knowledge and understanding of the complexities of economic changes over time in context with all the related cultural and political changes. The author is a historian and an empiricist (how refreshing!). One of the Appendices addresses the problem of Economics and History, starting with the author’s purpose in writing the book:

      A primary purpose of this project is descriptive. One of its organizing assumptions is that the task of empirical description may be undertaken without the apparatus of theory. This idea breaks in a fundamental way with an epistemic orthodoxy that has dominated the disciples of American social science since the late 1940s. So universal has this orthodoxy become in the United States that scholars who work within it are unaware that any other mode of thinking is even possible.

      In American universities, a social scientist is free to adopt almost any style of dress, demeanor, life-style, sexual preference, or political ideology, no matter how bizarre or preposterous the choice may be. But graduate students are required to embrace the conventional epistemology of their discipline, on pain of expulsion from the guild. If they dare to think about the world in any other way, their work is judged “unsound” and they are sent upon their way. …

      Inquiry became narrowly blinkered by theoretical assumptions, which often proved to be circular in their structure and increasingly ignorant of the world they purported to explain. As a consequence, social science became increasingly remote from social reality. The theory-centered epistemolgy of social sciences began by stimulating thought; it ended in stultifying it. …

      Lester Thurow in 1983 complained that his discipline had become a closed world. “In economics today,” he wrote, “theory has become ideology rather than a set of working hypotheses used to understand the behavior of the economy found in the real world … in my mind, mainstream American economics reflect more an academic need for an internal theoretical consistency and rigor that it reflects observable measurable realities in the world.” …

      The present work is organized on the assumption that there are at least two very different forms of cognition: seeing-observing and knowing-believing. American social scientists in the twentieth century have been taught to do teh second and despise the first. They are trained to know and believe but not to see and observe.

      1. Steve

        Your post was excellent and I agree with it in many respects. But I think you go too far.

        How would you explain the boom in behavioral finance and economics (Kahneman, Tversky)? There are plenty of economists working in an empirically-grounded way. Of course, you need some theory to encompass what you observe. Why is this so controversial?

        1. Valissa

          I quoted a book that was published in 1996, and I only excerpted a few points from an Appendix, so you got the author out of context. The author thinks both types of approaches are worthwhile and should talk to each other more, which at the time his writing he didn’t see happening very much.

  8. LeeAnne

    It wasn’t always the case that publicly held corporations were legally mandated to value shareholder price above all else like producing in a competitive market and employing people.

    Until this obvious travesty of putting share price first is acknowledged and reformed, the system will continue as a destructive force.

    1. Cahal

      Completely agree. I think shareholder value may well be the root of most problems. Perhaps it’s time to give worker democracy a shout?

  9. craazyman

    Just send them to Divinity School instead. ha ha

    But charge them less tuition, if you all can bring yourselves to even think about that. and sell you endowments and liquidate your graven images.

    It all starts with the “I and I Vibration”.

    We already know what money is. “We aer living in conscious time now. We all have de ansah, I say we all have de ansah. There’s a mystic river flowin thru de air.” -B. Marley

    1. craazyman

      srry shld be “natural mystic flowin through the air.

      a master like Mr. Marley would never have writtent something so clumsy as “mystic river flowin . . .”

      my bad.

  10. wafranklin

    “economics is about human action”

    Ignores impact of the physical world and its influences–which as I remember do not depend at all on human actions; also implies that there is an useful and agreed upon definition for “economics” anywhere.

    “human action has to have an ethical basis, because humans have ethics at their core”

    By what logic or imperative can anyone make this assertion? Humans respond to any number of inputs and circumstances, so many as to make behaviour impossible to model or understand.

    “economics considers human action as ethically neutral”

    Is economics even aware of human ethics or that they might or not be ethical. Not that it can be proved given the complete and egregious irrationality of what transpires in the real world among people and/or environments. Again, where is there any proof that economics really considers “human actions?” or even understanding the exist?

    “hence economics is lost because its model of a human being is wrong and incomplete”

    Implies that economics was ever found in any meaningful sense.

    “worse, it is used to mislead the masses. most establishment economists (eg, summers etc) are practitioners of deception.”

    How can economics be used to mislead a whole range of totally divergent characters, each with their own motives and biases–given recent history I would assert that no one seems to understand enough about economics (whatever it is) to mislead anyone else, except possibly Glenn Beck.

    1. Dean Sayers

      1. Economics & human action

      You’re making progress when you say that the material world is important, but it is not the only important aspect of economics. You go too far: both material and human activity are relevant to economics. Human activity is, after all, a material fact. Human labor applied to the material world forms the basis of the productiveness in economics.

      2. Human action as based on ethics

      I agree with your response here, mostly. Ethics is to me more of a critique of human society on a (usually) nurturing basis towards human interests.

      But human action is based on material conditions. Human action subsequently defines morals, which develop into ethics. Not the other way around, as the OP says.

      3. Economics and diverting the masses

      You don’t think that academia and media punditry (especially in a human’s formative years) help to determine human opinions and activity? As I’ve argued elsewhere, these ideas are simply another manifestation of material conditions. They are material insofar as they exist and occur. Why should some material facts be ignored just because there is a philosophical pretense about “ideas v. material”?

      1. Dean Sayers

        More on this:

        “How bizarre it is that people actually think that we are not primarily driven by our conditions. As they say, “nothing comes from nothing.” We experience this every day: the choices we make are like streets negotiating human social arrangements; the more viable ones become beaten down, easy and all-too seductive for those insufficiently self-respecting to stray from the grain, or too tired to try to fight it any more. And those that do forge their own path are chained to the yoke of material reality: don’t expect to find a rational framework of human activity that is totally divorced from empiricism.”

        Paving an Interstate on the Moral High Ground

  11. ella

    Failure to understand the effects of deregulation and dark markets means that Economists simply cannot see itself. Wearing blinders always results in the inability to perceive the world around you. Could this be the cause of their failure instead of being overwhelmed with data?

    The market players understood the harmful effects of excessive leverage AKA debt, FASB rules for hiding debt, and the inability to see who held what debt (dark derivatives markets). Thus, lending and the purchase and sale of debt froze.

    Mr. Summers should be able to remove his blinders and see the harmful effects of the deregulation and lack of regulation that caused this effect. It would seem logical that a man so well connected and educated would understand these simple principles unless of course he has chosen not to. Perhaps he believes that the so called free market is self healing or he believes that the market flaws must be hidden from the people to allow the Fed, Treasury, Congress and Admin time for their bailouts to work. Me, I am just wondering.

  12. Dean Sayers

    Delong is hardly “open-minded”:

    “So what is left of Marx’s project?

    An undeveloped philosophy of human liberation.
    An oppositional, revolutionary political stance (with absolutely no sense of how revolutions eat their own children).
    About ten paragraphs’ worth of asides in the “Communist Manifesto” and in the preface to “A Contribution to the Critique of Political Economy” about how economic change creates and transforms social classes which then struggle for political power and how those struggles then shift the path of economic development.”

    This kind of dismissiveness is characteristic of one who is either ignorant of or willfully diluting Marx’s life and ideas.

    1. attempter

      with absolutely no sense of how revolutions eat their own children

      And a corporatist like Delong pretends to have no sense of how capitalism eats all children in the end.

      1. Dean Sayers

        DeLong strikes me as having an imminently dry, academic attitude towards economic/moral issues, which would normally be appealing to me except for how deliberately centrist he tries to be. He is in the vein of the masses of masked academia, perhaps once afraid to stray too far, now they rely on that inter-institutional confirmation of a narrow narrative, consistently jeering at outliers from the accepted norm.

    2. sglover

      I think DeLong is almost the perfect lab-grade specimen of how broken academic economics truly is. Just today he’s recommended Larry Fucking Summers for the suddenly vacant IMF slot. This continues an impressive streak in which DeLong has consistently shilled for just about EVERY major public sector accomplice to finance sector rapine: Greenspan, Geithner, Bernanke, Summers. DeLong has sung hosannas to every one of them.

      Even when he’s blindsided by their scumbaggery, he’ll keep coming back with some lame explanation. It’s usually along the lines of, Well, OK, maybe I’ll concede that my boy totally fucked his last N gigs up and enriched himself pretty nicely in the process — but those situations didn’t use his **real** talents! And DeLong will only make that concession when the entire world has taken it as a given that his boy is indeed a self-dealing weasel.

      Doesn’t the “Grasping Reality With Both Hands” pretense kinda tip you off that this is a guy who lives in a cloister of smug obliviousness?!?!

    3. Roland

      There’s Delong, trying to exorcise that spectre!

      But Delong has just enough of a soul, that he can feel haunted–or at least hear that old ghost laughing at him.

      True to his neoclassical economic background, Delong keeps trying to approach Marx on microeconomic grounds, rather than on macrohistorical grounds.

      But another thing is that when posting on Marxist subjects, Delong has to write in code. He has a high-ranking university job. He has administration contacts. He can’t allow himself to frankly engage in a Marxist analysis of the global bourgeoisie. So he does what any contemporary academic does: he goes meta.

  13. F. Beard

    Our money system and thus our economy is based on government backed theft of purchasing power and usury.

    But keep trying to make that work properly, oh wise economists.

    1. mickeyman

      A large part of the problem is the insistence on using an axiomatic view of the Universe in economics (also in other social sciences which are used to form the backbone of foreign policy–I am thinking of geopolitics here).

      The hard sciences are predominantly inductive, premised on the repeated testing of hypotheses, which are discarded if they are disproven.

      Social scientists argue that there is a fundamental difference between, say, geopolitics and chemistry. Geopolitics, they argue, is not reducible to a test tube. You cannot rerun human history from the beginning while changing events (having the Axis win WWII, for instance) to see how things turn out. Consequently, the social scientists seem to have little use for induction or testable hypotheses.

      Yet the notion of testable hypotheses is so fundamental to science that it is impossible to argue you are practicing science if you aren’t using them.

      The principal problem with an axiomatic view of the world is that if your axioms are incorrect, your “science” produces absurd theorems, which generate disasters when they serve as the basis for foreign or economic policy.

      The “science” of Geopolitics, according to G. Friedman in his book, “The Next Hundred Years” stipulates that one of the world’s great powers must arise in Eurasia because of the size of the landmass and its resources. This is purported to be the reasoning behind the “Great Game” and much of the history of meddling in Afghanistan. The internal logic of geopolitics has driven such acts as the invasion of Afghanistan by the Greeks, British, Russians, and Americans; the invasion and destruction of Iraq; possible invasion or destruction of Iran; and carving up the Ottoman Empire into divided, squabbling countries.

      If we allow ourselves to be seduced by the idea that geopolitics is a purely explicative science, the explanations of which cannot be judged on moral grounds any more than could be the boiling point of water; then we do not allow ourselves to perceive that these actions are wholly evil, predicated as they are on the necessity of destroying lives and capital.

      Similarly, the conclusions drawn by economic “science” are that we should keep the current economic system as is, regardless of the damage done to the real economy (involved with the making of real things). Keynesian policies have resulted in the creation of enormous amounts of credit, all to fund government programs which for political reasons could not be funded through taxation. Keynesian theory prescribes some desirable (non-zero) rate of inflation combined with a zero-interest-rate policy. The end result is the theft of purchasing power from the savers of society. In the absence of the economic “science”, we would recognize this for a grand act of immorality–a crime committed against savers. But under the cover of economic “science”, it becomes a necessary act, as free from moral judgement as the boiling temperature of water.

      1. F. Beard

        Keynesian theory prescribes some desirable (non-zero) rate of inflation combined with a zero-interest-rate policy. The end result is the theft of purchasing power from the savers of society. In the absence of the economic “science”, we would recognize this for a grand act of immorality–a crime committed against savers. But under the cover of economic “science”, it becomes a necessary act, as free from moral judgement as the boiling temperature of water. mickeyman

        Very well said.

        What the Keynesians fail to recognize is that common stock as money renders interest rates irrelevant since no borrowing, much less usury is required. What is required is true liberty in private money creation – something that is unthinkable to Keynesians, I imagine.

  14. Tao Jonesing

    I’m with DownSouth and attempter on this one. The modern conception of the free market paints it as all knowing and all-seeing, a modern day secular god, and economists are its priests who stand before the masses reading out loud in a language that nobody else can understand (or so they tell us). After all, ecnomics is hard.

    And this god chooses kings, just as the Christian God did before it. All the banksters are rich because the market said they should be. No one can question their right to have that money as it is a divine one.

    No incremental changes can save economics, which does not exist to accurately describe the world but to persuade the masses to accept their sorry lot in life, which the lord god the market hath provided.

    1. F. Beard

      And this god chooses kings, just as the Christian God did before it. Tao Jonesing

      God warned the Hebrews what kings would do to them in 1 Samuel 8 but they wanted one anyway.

      No one can question their right to have that money as it is a divine one. Tao Jonesing

      Usury between fellow countrymen is forbidden in Deuteronomy 23:19-20. Question? Do bankers consider the rest of us foreigners?

      1. attempter

        Question? Do bankers consider the rest of us foreigners?

        That’s precisely what they, and all corporatists and “libertarians”, think.

        They believe the definition of citizenship, indeed of being human, is to own property (in practice, to be a big, not small, property-owner). All others are subhuman resources.

        So it follows that civil society should be destroyed completely, while government should be stripped of all its original roles and maintained only as simulacrum (e.g. sham elections), bagman, and thug.

        Meanwhile all real power should be transferred to the corporations themselves and to corporatist bureaucracies like the IMF and WTO which like the Nazi General Government of Poland are completely outside the nation-state structure. This is the instrument of direct corporate dictatorship.

        So big corporations and the super-rich want to politically secede, leaving nothing of civil society or conventional government but only a societal wasteland behind them. But they want to take all the real assets and power with them. This is the final and most vast enclosure process.

        They want to turn the vast mass of humanity into aliens on our own planet. And there are still those who want to argue about what we should do about it.

        1. F. Beard

          That’s precisely what they, and all corporatists and “libertarians”, think. attempter

          Actually, true libertarians, as opposed to fascist poseurs, are against the government backed counterfeiting cartel, the banking system

          It is you progressives and liberals who insist you can regulate the counterfeiting cartel. True libertarians propose to abolish it.

          As for corporations, common stock is a usury free, democratic money form. Without the counterfeiting cartel to borrow from, the corporations would likely have had to issue vast amounts of common stock to pay their workers.

          1. attempter

            It is you progressives and liberals who insist you can regulate the counterfeiting cartel.

            That’s cute.

            But seriously, if you want to call yourself a libertarian and fight to take the term back from those who hijacked it but are really fascists, good. There are some anarchists who still want to do that as well.

            (Historically, libertarian was a synonym for anarchist, and was only hijacked by propertarian fascists in the 20th century.)

            But don’t pretend that your definition is standard today.

  15. ep3

    in regards to Larry Summers. Isn’t he a member/former member of the Trilateral Commission and the council on foreign relations? It seems to me that looking at the lists of these organizations, anyone in these groups is instantly connected in the halls of power. So these elitist groups run things and influence who is in power.

  16. Cedric Regula


    I am shocked there are questions, new facts and data in this exam!

    So we can’t just pull whatever ready made data series from FRED or BLS and plug it into our old econ models, and then tell the world what is going on? Maybe embellish at bit with some new anecdotal buzzwords to freshen up the presentation?

    Isn’t that being a little harsh on a PhD? Kind of like asking a rocket scientist to design a rocket instead of just buying one somewhere?

    You don’t think you’ll get anywhere rattling the Ivory Tower like that, do you?

  17. sglasheen

    “Other professionals — lawyers, doctors, accountants — have faced up to requirements of staying current in fields that change rapidly.”

    I’m not sure economists are directly comparable. Lawyers et al are trained with the expectation they will be professionals, while economists are trained to be academics who may end up being professionals. Which, I suspect, has a strong effect on the culture of the discipline.

    Academics are expected to do original research first and foremost. I suspect that as a result of this, the culture of academia teaches two mental habits which can create blind spots. The first is that successful research requires specialization which, in turn, can lead to myopia. Professionals can specialize, but the training begins with a generalist basis. Moreover, the specialization tends to correspond to an external system, like the circulatory system or the tax system, which are delineated clearly, and the specialist will generally only be consulted on questions pertaining to this system. Academics 1) always specialized to some degree and 2) are more likely to specialize in an informal fashion depending on their research focus. This myopia can be aggravated by the academy’s tolerace for intellectual ideologies (i.e. schools of thought), which can aid in the creation of a coherent body of scholarship but which also leads to the instinctive devaluing of insight from other schools of though. By contrast, professionals tend to find pragmatic flexibility far more useful than scholarly consistency and will be more likely to put aside such preferences if something “works.”

    The second habit of thought is a but more subtle – academics are trained to pursue the cutting edge in their specialization, while being ambivalent to whether they understand any research which does not serve this pursuit. In a highly competitive environment, ambivalence of this sort is tantamount to discouragement. By contrast, lawyers and, I assume doctors and accountants, are trained to use what is known and established first. The cutting edge is important, and should be incorporated into one’s work, but a lawyer who makes an audacious argument without knowing and addressing the black letter arguments is committing malpractice. The same goes for a doctor who tries to treat an infection with an experimental therapy without considering whether antibiotics would be appropriate. So there is also an academic tendency to “forget.”

    This is not to disparage the academy. The narrow pursuit of the cutting edge unquestionably advances human knowledge. However, it is not necessarily a professional skill-set.

    1. Valissa

      Opinion 104: The Shocking State of Contemporary “Mathematics”, and the Meta-Shocking
      Fact that Very Few People Are Shocked

      I just came back from attending the 1052nd AMS (sectional) meeting at Penn State, last weekend, and realized that the Kingdom of Mathematics is dead. Instead we have a disjoint union of narrow specialties, and people who know everything about nothing, and nothing about anything (except their very narrow acre). Not only do they know nothing besides their narrow expertise, they don’t care!

  18. Siggy

    Mr. Smith,

    I like your piece.

    Will your next piece follow the money as it drives motivations?

  19. Just a thought...

    “Other professionals — lawyers, doctors, accountants — have faced up to requirements of staying current in fields that change rapidly.”

    Yeah, numbers 1 and 3 are really at the epicenter of true professional education. Seriously, BS comments like that immediately undermine any arguments you try to make (and so early in the discussion, what a shame). I guess I shouldn’t be too surprised, I see from your website you’re a lawyer. Looks like this post is just oozing with professional honesty already.

    I’ve attended numerous continuing professional education events for both lawyers and accountants and here are my observations. I would say the attendees and events can be broken out in two ways…

    (1) The CPE event involves a trip to a seasonally advantageous location on the company’s/firm’s dime where the “professionals” are forced to endure a few hours listening to some nitwit consultant talk about team building, maximizing performance or incorporating technology to stay in front of their increasingly complex responsibilities (it’s always so sad to see hungover but clearly over-worked professionals recovering from such a taxing night) followed by the short but obligatory ‘hot topic’/’industry’/’regulatory’ changes update, an afternoon of golf and an evening of drunken foolishness. Only to start anew the next day with the same bunch of hungover “professionals” listening to yet another nitwit. But they’re clearly motivated by the need to stay current in their profession, right? It has nothing to do with skiing or the beach, right?

    (2) The professional’s CPE requirements are coming due and they failed to get in front of those requirements like the educationally motivated folks in group 1, so they locate the nearest quick hit session that qualifies for CPE credit and they sign-up and attend long enough to get their signature on the sheet at the back of the room. After which you can find them sitting in the bar at the Marriott, where the event was held, drinking and reading through the e-mail they missed that day when they were staying current on their profession.

  20. old truths

    1. Economics & human action

    material inputs etc.

    economics is traditionally defined as the optimal decision making to satisfy unlimited desires with limited resources.

    this definition ignores the fact that humans have a sense of right and wrong, we’re not just an optimality algorithm problem.

    2. Human action as based on ethics

    “Humans respond to any number of inputs and circumstances”

    humans know “right and wrong”, the common sense word for ethics. if we respond to rain by opening an umbrella, that’s fine, but its trivial. that part is not the core of the human condition. our sense of right and wrong about our choices is. that we are ethical beings does not imply we have no other decision making priorities.

    and economics influences our choices and behavior. in fact that is the whole reason for economics – to help make better choices in the use of resources.

    there is evidence that economics study damages human character.,Gilo,Regan.93.pdf

    4. deception etc

    “given recent history I would assert that no one seems to understand enough about economics (whatever it is) to mislead anyone else”

    for example if a person pretending to be a doctor gives you a substance that is known to be harmful to him, that is deception. he does not need to know medicine completely well to practice that deception.

    if the person (eg astrology) gives bad advice while meaning well (which may be the case with some economists), then that is incompetence either of the subject matter and/or of the person.

  21. GeorgeNYC

    Just simply Bravo!!

    I think over time we will realize that the position that economics is a “science” will be seen as just a cover for its dogmatism. In the end, I wholeheartedly agree that it is really much more like a system of religious belief than a scientific inquiry. The problem is that it “looks” scientific. But then I bet that people in the Middle Ages could not readily distinguish “theology” from “science.”

    One would probably want to say that economics needs its Martin Luther to nail his theses to door of some economics department.

    However, I think it really needs a Galileo who will suffer at the hands of the establishment to show how wrong the establishment is.

  22. Jim

    “…how carefully should economics compare and contrast the specific content of the assumptions it makes with the specific content of the conclusions it draws.”

    Very carefully!

    It may well be that in economics (as well as almost any other sphere of human discourse)the search for foundational premises only makes us more thoroughly aware of the partiality and incompleteness of our starting points.

    It may well be that all of our arguments are circular.

    It may well be that there is always a fusion of the descriptive and the normative.

    It may well be that “descriptive statements” and “normative statements” do not constitute two contrasting categories.

    It may well be that the descriptive is already normative in order to follow through on its project of being “descriprtive.”

    It may well be that all of us have great difficulty in living with and tolerating theoretical insufficiency.

    And it may well be that we all live a condition of not knowing for sure–and that ethics has to do with learning to live in such a condition.

    1. Steve

      Very good post! These ambiguities seem to drive most people on this site crazy.

      Economists do themselves no favors by failing to make the division between positive and normative economics. Everyone (except me) hates Milton Friedman these days, but in his writings even he was careful to make this distinction. Although I have a lor of sympathy for his views, he probably should have kept his social thinking to himself. Of course, Krugman is just as bad; his neo-Keynesian views are fetishes without any empirical support.

      The only way forward for economics as a social science is to stay grounded in empiricism.

      1. alex

        “The only way forward for economics as a social science is to stay grounded in empiricism.”

        It has to start being grounded in empiricism before it can stay there.

      2. Martin Finnucane

        Loquacious Steve avers:

        The only way forward for economics as a social science is to stay grounded in empiricism.

        Do you get some sort of bonus for hitting the same keywords over and over? “If Steve use the word ’empiricism’ three more times, we’ll promote him to ‘Steven’.”

        Anyhow, I still didn’t see your response to Yves’ response to your original point: you erode your credibility to NIL in coupling economics with empiricism. Is that not right?

        I reckon I’m not in the “in” crowd, so bear with me: are there lots of clever people out there that actually stand up for the proposition that economics should stay empirical? You seem clever, but the thesis seems, well, silly.

    2. Preparation H

      Descriptive Statement: “Mama, I see an economist hanging from a lamppost.”

      Normative Statement: “Son, it is better for the economist to hang than to be alive.”

  23. Hugh

    I could see asking an astrologer these same questions with much the same results. They would talk about houses and cusps, that this is in opposition to something and that is ascendant, and at the end of the day what would we have learned? What would have changed?

  24. RebelEconomist

    Having tried to teach economics in a practical way at a UK university, and failed to break the mould, I could write a book about this topic, but to suggest one reform that might be most pervasive, it would be to put a real scientist like a chemist, engineer or biologist in charge of every university economics department. Academic teaching and “research” in economics is choked by pointless mathematics (as opposed to econometrics, which is generally useful), but mathematics has become a test of economic machismo so that any economist who resists its use is regarded as suspect. Only proven real scientists have the credibility to get rid of superflous mathematics and instil genuine rigour into academic economics.

    1. old truths

      excessive use of higher math in economics and finance (as evidenced in the crash inducing instruments) is to confuse and hide the truth. for some nefarious purpose, in general.

      aka deception.

      1. RebelEconomist

        I don’t think there is some conspiracy. It is just a way of working that has become entrenched over many years. But it is an unproductive and excluding way of working that should change.

    2. Math Chick

      Biologists and chemists, as well as most engineers know nothing about mathematics. What you need is to subject the mathematical content of articles in Economics to a panel of mathematicians whose criticisms of the paper would appear alongside its publication. My feeling is that most of the criticism would be withering, and the bullshitting would quickly grind to a halt.

      1. Roger Bigod

        I once took a course in microeconomics taught by a guy who’d received the Word at the London School of Economics. The math was valid, but it was just 19th Cent partial differentials and summation signs. The same is true of the Black-Scholes equation. I assume the professional journals are the same kind of stuff.

        What was unimpressive about the course was the lack of any empirical checking for the models. Glaringly different from physics, where there’s a constant interplay between the math and experimental data. As I recall, there was only one experimental test of a theory. The theory said that monopoly leads to overinvestment in the underlying business, and someone had gone out and counted the number of gas stations per pop under different regulatory regimes. It was certainly a step in the right direction.

      2. alex

        What basis do you have for your assumption that the most serious problems in economics are mathematical rather than scientific (e.g. ignoring empirical evidence)?

        1. RebelEconomist

          That was my impression from my experience of being both a user (as a central banker) and a teacher/researcher of economics. In both environments, I found that my peers could not answer what I considered to be basic questions about how the economy worked. I suspect that one reason for this is that many economists get preoccupied with mathematics, partly because it is difficult and partly because its use is prestigious, at the expense of the reality of the economic mechanism being modelled. For example, as a university lecturer teaching monetary economics, I guided students through a problem set following a lecture entitled “cash in advance in a limited participation model”. Though the students could mostly do the standard mathematical tricks required to solve the problems, only two or three out of about fifty were able to explain the meaning of the title of the lecture (ie the meaning of “cash in advance” and “limited participation”) when asked. In academic finance, I was advised to look for a problem that would yield a closed form solution if I wanted to get published in the prestigious journals.

      3. RebelEconomist

        That is partly my point. These kinds of scientists are generally at least as capable of using mathematics as economists, but not for its own sake, and their rigour is unquestioned. If economists are using more maths than biologists, it is probably unnecessary.

  25. Susan Truxes

    Language fails us. But it is always so encouraging to try. I liked Douglas Smith’s “exam questions,” and they even amused me. The answers would be so mind-boggling! I want to hear them all. But that is obviously the point. So here I pause because I believe we skim over the questions we cannot answer on one side or the other and accept our loss of meaning and go on, instinctively. Its survival. Still I believe those questions should be incorporated in every economics curriculum. This article isn’t just a spoof. Even though language fails us it might just be the mental (biological?) manifestation of the urge to evolve. And there is no denying that we really get after each other with it.

  26. alex

    Wow, 62 comments and not a single mention of Steve Keen? He does a great job of ripping a new one in most of economics, at both a professional/academic level and one accessible to the thinking lay person. Nor did he wait until some “crisis of confidence” or whatever excuse they’re using for their past idiocy – he’s been at it for decades. He also predicted the current crisis, and he’s been mentioned by Yves, et al, a number of times.

    His blog is accessible:
    and I highly recommend his “Debunking Economics” book for a map of where the bodies are buried.

    Bottom line: most economics bends over backwards to avoid that “empirical evidence” stuff that makes other sciences so tedious and inelegant. For example the standard Micro 101 assumption (oops, I meant unquestionable and self-evident fact) that firms try to produce where marginal revenue equals marginal cost was empirically debunked years ago, yet most economics keeps rolling along as though nothing had changed.

    1. mannfm11

      Keen has it down as well as anyone I have studied. Michael Hudson is a compadre of his, though I believe Hudson does differ in some fashion. Keen is very simple, in that he points out that neoclassical economics leaves out the effect of debt, because they treat it as a transfer. It is not a transfer, but an executed contract calling for delivery of something in the present and a delivery of that something plus more of that something in the future. The party that delivers that something, acts as if they still have it, while the other party is forced to come up with it and mare. There is a limit to how much of the economy can be tied up in this process. Being that the manufacturers of credit found that the more of it they could create and draw a fee from its creation, the richer they could get, save for the fact that the more they created, the more leverage they took on. You can only shovel the chips to one side of the table for so long until the side from which they are shoveled has no more and the game ends. There is nothing to this mess other than the world economy is all loaned up.

  27. alex

    Douglas K. Smith: “Why isn’t Summers wearing sack cloth and rolling in ashes?”

    Because the tar and feathers get in the way?

  28. Jim

    Summer should not be rolling in ashes, he should be making little ones out of big ones at a federal prison, along with Paulsen, Rubin, Blankfein, Bernanke, etc.

  29. Main Street Muse

    The section on “criminality” is irrelevant, in that the behaviors exhibited by the financial sector are all apparently blessed by the current rule of law in America. (See any mortgage brokers charged with fraud? CDOs and other ephemeral instruments are legal, right? And didn’t the bankers get bonuses after they crashed the economy?

    Name other economic systems where those responsible for such massive and catastrophic failure are so highly rewarded? Name any other business sector where failure is liberally rewarded with a payout of tax dollars. Can a system that rewards failure anticipate a long and glorious future? If no, outline your expectations for a system that continues to reward failed business practices?

    The section on “financial sector as casino” is incomplete and requires the inclusion of this question: Name casinos outside of Wall Street that have received trillions in dollars in federal welfare, no-interest loans and other federal support.

    Another section could be devoted to “the invisible hand” and could include questions like:

    Is the “invisible hand” a faith-based concept? If no, outline the empirical evidence that supports the existence of “the invisible hand?” How does the “invisible hand” work when “the markets” are controlled by corrupt executives motivated predominantly by greed? How does the “invisible hand” work when financial entities move toxic assets off the books using clever (but apparently legal) accounting techniques? How does the “invisible hand” work when abysmal business behaviors are propped up by a massive federal bailout, or is this trusted “hand” in fact crippled by such intervention?

    Discuss Alan Greenspan’s devotion to the concept of “the invisible hand” and how this devotion affected his ability to regulate the industry he was responsible for regulating? Is the current American regulatory system effective in regulating the financial sector?

    Another section on “moral hazard” should be required: Define “moral hazard.” How can a capitalist economy successfully grow when its financial sector requires an umbilical cord flowing cash and other nutrients from fed reserve to financiers? Can you be a “capitalist economy” when your financial system is riddled with moral hazard?

    Name the consequences of a system that operates with banks that are TBTF. Name the benefits of TBTF to a society and its economy. Do the benefits of TBTF outweigh the hazards and costs? Be specific when discussing the benefits of TBTF to the economy outside of Wall Street.

    1. mannfm11

      Turns out those invisible hands weren’t so invisible and they were rapidly shoveling gold into their pockets. The truth about the invisible hand is that you cast your bread onto the water and let it go. Modern finance seeks to suck the bread out of the water by stripping assets through debt. The greatest prohibitions in the old testament were against debt. The bondage in Egypt was a debt bondage, read Genesis. They gathered up all the money when they set up these central banks and loaned it back to us against our person and our property.

  30. skippy

    Economics is_too me_ a flight path submitted for celestial travel using gravity wells (debt multipliers) for acceleration, this worked well enough when our optics enabled us to view body’s in advance.

    Unfortunately the speed of our activity has out paced our optics, speed and mass thingy, by the time we view something its already in the rear view mirror (MBS / Derivatives et al). Too me, this is the reason…unspoken…for our regulatory abandonment. All attempts at steering input are predicted on old data sets, with out advance observations at incoming objects, all whilst nation-states fight over the steering wheel.

    In other words they are guessing…wildly. All in a finite world, with increasing consumption and its side effects, exponentially multiplied via generations demand…what could go wrong.

    Skippy…black celebrations…first of all there are fly’s on the wind screen, for a start…reminding us we could be torn apart.

    PS. how many here…have been…speeding down a road, across the water, or the sky…full of themselves…when in a millisecond it all changes…time folds in upon its self…body stasis…mind becomes a cinema screen…walk away internalize/externalize…body’s memory pulling you forward…till at less than 3m a ladder kicks out…morte humor…bottom line insight stuff…why do the big fires make it so hard to love each other…ummm.

    1. F. Beard

      Unfortunately the speed of our activity has out paced our optics, speed and mass thingy, by the time we view something its already in the rear view mirror (MBS / Derivatives et al). Too me, this is the reason…unspoken…for our regulatory abandonment skippy

      Who cares how fast something is if it is honest? But our money system is inherently dishonest and so fear is warranted.

      1. Skippy

        How to respond, too such an uninformed bit of tripe ie total lack of respect for the Laws of the Universe, by invoking hypocritical GDhead inspired values.

        Monies_in it self_is advantage over another[s (disadvantage to those with out/less), regardless of vaporous T/F definitions of theocracy[s opines.

        Advantage inherently honest/dishonest[?], your context and syntax…are in conflict. Is a rock T/F or is its utilization by an outside actor T/F, you constantly conflate the issue. the problem with debt backed monies is mathematical ie the need for exponential growth = futures demand brought forward = population growth for financial gain = consumption = degradation of planet = futures reckoning.

        Personally, your seemingly noble offer of common stock / private monies for debts out side Government dues (Government intrusion = bad x intervention out side the commons, but Governments fault anyway) is opaque. Churches printing maybe or private monies cough Koch industry’s (shudder), advantage exorcized, T/F. Is that the razor-blade with in the apple of liberalism revealed once again…um.

        Skippy…speed and mass are directly correlated to steering ability and if you can’t see…you can’t ski, if my goggles were honest / dishonest would determine my ability?

        PS. I mistook your common stock for social dividend, my bad. I vote NO to all issuance out side of government auspices, the commons just needs to reestablish its place in government. I take a space ship earth monies predicated on long a long term journey…thank you. The liberalism gang can go paddle a canoe, in the time honored tradition, look it up.

        1. F. Beard

          I vote NO to all issuance out side of government auspices, the commons just needs to reestablish its place in government. Skippy

          I expect the States to take up issuing their own money soon. Since only gold and silver may be made legal tender by the States per the Constitution then I expect they will issue “Tax Tokens” instead, good for paying that State’s taxes.

          And once the States start issuing their own money then we are much closer to genuine private currencies too.

          “There is nothing so powerful as an idea whose time has come” Victor Hugo

    2. Martin Finnucane

      The Pythonic Skippy uttered this oracle:

      In other words they are guessing…wildly.

      I don’t mind too much when the divine afflatus has one writing “body’s” instead of “bodies.” Hell, I, Finnucane, have been touched by divinity myself, from time to time. However, don’t be fooled into thinking that economics is wild guessing. Economics is absolute knowing: knowing that public spending crowds out private investment; knowing that individuals are rational profit maximizers; knowing the 50 bucks that I just plunked into my gas tank is a natural result of the wonderful calculus of supply and demand (and nothing else, natch). Take the term “knowing” in as ironic (or sarcastic?) a sense as you see fit.

      We have not outpaced our optics, all Thomas Friedman style. Rather, the reality is more dreadful, and boring: we are ruled over by a congress of louts, and we’re too supine to do anything about it. That don’t feel too super-optically speedy to me.

      1. Skippy

        There is insufficient data (speed and mass) at any given point (sample), in order to to effect direction in real time, every thing is a lagging indicator, playing catch up, know wonder so much humanity is ground up by it.

        Skippy…how about you drive a car, with various lag times for input, speed, fuel, oil, temp, vision, shape, size, mass of control interfaces, weather occurring around you, all at different points internationally, simultaneously. In a model T you can get away with it for a bit (fools bravado?), in a Bugatti Veyron, methinks not see:

        Were going 400kph, means the tires last us 15 mins, but thats okay because the fuel will only last us 12 min… lol

        PS. did now dead economists foretell of the computational power and speed in their opines…um…HFT, global FX markets.

        1. Jason Velveeta

          Skippy said:..We’re going 400kph….

          And we’re on the Santa Monica Freeway (the freeway for freaks) nearing the East L.A. Interchange.

      2. Skippy


        Martin Finnucane used — “divine afflatus”

        Repetitive see: originally spelt “adflatus,” made up of “ad” (to) and “flatus” (blowing/breathing), the noun form of “flāre” (to blow). It can be taken to mean “to be blown upon” by a divine wind.


        Are you engaging in a bit of double entendres[!]

        Skippy…if the later, well played and very cheeky…kudos!

  31. Deus-DJ

    It should be mentioned that there already exists a non-orthodox economics program in various places around the world(though admittedly a minority who exist outside mainstream, neoclassical economics). I attend UMKC, who for those that don’t know is one of the top 2 or 3 heterdox(non-orthodox) economics programs in the country.

    Douglass Smith should at least be kind enough to mention these heterodox programs somewhere in his piece. Though as is the case for all “smart” mainstream people who criticize the mainstream viewpoint, they actually know little of these heterodox programs(which is very unfortunate…why is this, Mr. Smith? Are you afraid of instantly being pinned as a loser who supports a bunch of losers who go unrecognized by mainstream economics?…Actually I wouldn’t blame you if this were the case, I used to think the same way). An instant giveaway every time is when they frequently refer to “behavioral” economics or finance. Behavioral economics is not economics….it is psychology. It is something that sprouted out FROM WITHIN THE MAINSTREAM to simply say “wow look, the mainstream view is wrong here, here…and oh here”. So rather than dismissing it altogether they like to nitpick at it and hope change occurs that way…its time those of you within the mainstream actually grow some balls and call neoclassical economics for what it is and where it belongs: trash, in the trash can.

  32. eli

    Not sure how the substance shakes down, but the gambit of posturing as the arrogant professor giving the (actual) professor homework didn’t turn out so well:
    a. it DID bait a response.
    b. that response is devastating.
    You may want to just go ahead and build an argument next time instead of trying the cutesie stuff.

  33. F. Beard

    IOUs sure, anyone can do that … skippy

    Money need not be debt. Money can be a share as in common stock. Not only can common stock be debt-free but it is also democratic since the money recipients (stock owners) can vote.

    1. skippy

      Money is just a tool, whom welds it and to what design is what matters, these days its a pure political engineering tool…dough social engineering tool. This tool is the Biggest club on the planet, those those weld hold no office, are uncountable to anyone. They play domination games for entertainment, personal pleasure, mirrors to reflect their greatness, we are but dust clinging to their mirror, we either amplify/reflect their greatness or as a blemish removed.

      Sadly the commons (middle class {completely fragmented thank you libertarians et al) have lost their place at the table and it ain’t coming back. I would submit that down the road, anyone caught creating, using, or any other attempt to subvert this tool as it exists, will be treated as a traitor and subject too the fullest breath/reach of the law. So go ahead and play games with their tool, mechanics are renown for their jealousy.

      Skippy…your efforts might bare sweeter fruits…if…they had a set at the table. Get a seat at the table or shut up in the cheep seats is all you will hear, followed by the brute squad that your tax dollars pay for….lol…hard to negotiate from the bottom of a pit…eh. Be well Beardy.

      1. F. Beard

        Sadly the commons (middle class {completely fragmented thank you libertarians et al) … skippy

        Libertarians have no problem with voluntary associations including civic ones.

        Get a seat at the table or shut up in the cheep seats is all you will hear, followed by the brute squad that your tax dollars pay for….lol…hard to negotiate from the bottom of a pit…eh. skippy

        Oh, I don’t have a seat nor do I want one. Perhaps it is this country’s sad fate to ignore the truth because it was spoken by a nobody.

  34. Clonal Antibody

    I don’t think that DeLong has the guts or the intellectual acumen to answer these questions honestly.

    1. Clonal Antibody

      BTW has anybody contacted DeLong for his reactions on this rather scathing evaluation?

  35. michael

    Fantastic post.
    I love the category “People who attend to ethical and other rules but paint for themselves and others the most optimistic picture possible of their behavior and choices, especially when they’ll get rich by doing so.”

    In a broader sense (keeping the respect of the economists community, getting paid but no riches) I believe many economics professors belong in that category. And that includes DeLong.

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